Shrewd investors or global bottom feeders?

We’ve had several days to digest plans by CNOOC, the Chinese oil company, to buy Unocal for $18.5 billion. The price seems rather high, given that Chevron was only willing to pay $16.6 billion.

A lot has been made of recent bids by Chinese companies to acquire Maytag and IBM’s PC division. Is this cause for fear, or reason for thanks?

Let’s face it, Maytag has been whipped by the likes of Whirlpool and General Electric in recent years as it failed to modernize and improve efficiencies. And IBM’s PC division? It’s little more than a chance for a regular beating by Dell.

Are the Chinese a threat if they’re buying up troubled U.S. companies that no other investors want?

They’re willing to pay top dollar because they want the expertise of the employees. As CNOOC Chairman Fu Chengyu told my colleague Lynn Cook last week, acquiring middle managers and other creative thinkers “is an additional value for us beyond our offer.”

On the other hand, how strong are these managers if they couldn’t pull their companies out of their current funks in the first place?

The Chinese certainly seem to be making more astute investment calls than the Japanese did in the 1980s, but it’s unclear if they have the long-term management prowess to salvage the companies they’re buying. If they can’t, those assets may wind up back on the market in a few years at a greatly reduced price.

In the mean time, the question remains: Are CNOOC and its brethren shrewd investors, or simply the latest global bottom feeders?

UPDATE: Of course, if CNOOC is overpaying, it may not matter, considering it’s sugar daddy is the Chinese government. Here’s a report from Bloomberg News on how the financing would work:

CNOOC Ltd., China’s third-biggest oil company, will borrow $7 billion from its state-owned parent at zero or lower than market interest rates as the Chinese government helps finance an $18.5 billion bid for Unocal Corp.

CNOOC will borrow $4.5 billion from its parent China National Offshore Oil Corp. for 30 years at an interest rate of 3.5 percent to fund the bid, Chief Financial Officer Yang Hua said on June 24. It also got a $2.5 billion bridging loan from its parent at zero interest rate, Yang said.

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State-owned oil companies only function (and not necessarily well) if they monopolize exploration/production is their nations, as Pemex does, or if they wisely partner as subordinates with aggressive, profit-seeking companies from other countries, as do Petrobras (Brazil) and Ecopetrol (Colombia). It would be interesting to see the Chinese communist mentality attempt to operate in the highly competitive environment of the international oil business. Will they simply “parasite” their way forward, as a communist must, or might they actually work to locate and produce oil… thus becoming productive capitalists? Producing oil isn’t nearly as easy as pirating a DVD, or enslaving your political prisoners to manufacture cheap textiles. Good luck to the Chinese, if they think they can beat the oil out of a geologist.

Full Disclosure: Shrewd investors or global bottom feeders?Loren Steffy of Full Disclosure offers some common sense over China, and thier bids to purchase American companies:A lot has been made of recent bids by Chinese companies to acquire Maytag and …

Sometimes I wonder if the people that studied history ever studied economics and vice versa.

Years ago when the Saudis, Kuwaitis, and other oil abundant nations started to accumulate excess amounts of cash, while the United States complained about the balance of trade, and all the money flowing out of the country, these cash rich nations realized that in order to keep the very economies that were making them rich stable, they needed to invest that money back into the United States. They started buying property, office towers, businesses, and anything else that looked like a good investment. Protectionist Americans screamed that we were selling our country bit by bit to foreign interests. I had a really good laugh at the time.

Think about it, our land, our property, and our office towers all stayed in the United States. The money that we paid to the oil producing nations came back to us and lined our pockets and was appropriately taxed by the federal government.

All of this reminds me of the “brilliant” citizens that rail about our pouring money into the space program, complaining that we shouldn’t be sending money like that “into space”. Wasting it, they say. Once again, think about, practically every dollar we spend on the space program goes to American contractors and American employees. All of who paid taxes. Money gets spent and circulated in our earthbound economy. What we send into space is nothing but men and very finely crafted materials. The money stays on earth.

In the case of Unocal, the investors, particularly the large institutional investors, will be able to recover their investment in a weak firm without crashing the value of the stock, and they will then be able to reinvest that money in other stronger, more viable segments of our economy.

To reiterate, the cash, which was flowing to China, flows back in part to America, and we profit from it.

What I find it troubling about the transaction is that this is essentially a redistribution of global oil resources. China’s economy and their energy needs are growing, 10% a year by some estimates. The resources, while growing, are finite. The entry of China into the realm large-scale energy consumers is going to push up the price of oil and energy in this country. In my opinion, this is one of the many underlying causes of the recent increase in the price of oil. Given this size of China, and its growth potential, they will eventually become the largest energy consumer in the world and driving up the cost of everything. Talk about a new world order!

When it comes down to it, though, we can’t refuse them. They need our expertise in energy management and production, and we need to recover some of the money that we ship over every time we go to Wal-Mart. If they don’t buy Unocal, they will eventually spend their money on another company that can give them the same capabilities.

In the old days, there might be the threat of China going to war to acquire the resources it needs. In this day of global economies and interdependent needs, war is not an option.

We have to let them buy Unocal. If we refuse them, and we are consistent about it, they will bypass us. I am sure that would please and delight the more protectionist elements in our society. Ultimately, however, that can only marginalize our position in the world. We can’t refuse to play the game simply because we don’t like who’s playing. Even my six year-old daughter understands that now. She pouts, but she stays in the game, because it is the only way she will ever have a chance to ultimately win.

It is interesting that most of what you read about this topic is related to finance… Here’s what T. Boone Pickens was quoted as saying in the Chronicle article:

“We shouldn’t have any fear of the Chinese, at least not in a business sense,” Pickens said.

“…at least not in the business sense.”??? Well, in what sense might we have fear of the Chinese when it comes to deciding whether they should be allowed to buy up leading (albeit supposedly “faltering”) American companies?

He went on to say that whether the company should be sold should be up to the shareholders – that the shareholders own the company, not the politicians… In thinking through this statement, it is like he is saying that that the shareholders should not be denied their profits, even at the risk of giving up a bit in terms of national security…

What amazes me is that there is no discussion on the loss of intellectual property, non-tangible assets, or other things that companies here in the US have worked for decades to acquire… Everything that I have read is all about the deal – and how the shareholders will fare in the deal… What about the non-shareholders – what if they are adversely affected by letting the deal go through? What if the deal has adverse consequences that were not adequately evaluated before selling out?

If this discussion were about the Chinese buying Boeing, you can bet that it would not be allowed to go through over concerns to national security… Why would that be the case? Not simply because the deal is about the production of airplanes, but because of the non-tangible aspects of the company – the know-how, the research, the business processes, the intellectual property – those are the things that have put Boeing where it is today… That is also a clear example of why China would want to buy Boeing if it could…

At a recent Society of Petroleum Engineers Digital Energy conference here in Houston, I met a Unocal manager and talked some about their Information Technology strategy – that was just before the Chevron offer was announced… From what I could tell, Unocal has established a direction as to where they are going with respect to IT and have put significant effort into it – they wouldn’t have been represented at this conference had they not given it some thought…

China’s oil company is trying to do the same thing – figure out their long-term information management strategy in an attempt to kick their oil industry in gear. If you don’t believe that, make a few calls to some of the big consulting firms and see what they are doing in China… What you will find is that the consulting firms are exporting the “best-practices” to China for a quick buck… You’ll also discover that to be pretty much a one-way street…

You can rest assured that the Chinese can derive some significant additional value in fast-tracking that effort by acquiring a company that is well underway with that effort. After all, a US consulting firm has already told them how to do it…

Whether the company in question is Unocal or the next one that comes up on the block, it doesn’t really matter… If someone is out to buy more than just reserves (as in IT infrastructure, knowledge management systems, document management tools, etc.), they can afford pay more than someone who is looking primarily for the cash value of the company’s tangible assets as Chevron is…

The story is similar with Maytag… If you go down to Lowe’s or Home Depot today and look around for a top-of-the line washer and dryer set, where are you going to end up? Likely, you’ll end up looking at the Maytag display… Their current Neptune line is nice… It is innovative, and if it weren’t so expensive, I would have a set at my house… If you ask yourself why Maytag products aren’t selling well, you’ll probably decide it’s not due to quality – it’s due to price… They produce a solid, desirable product – but it is expensive…

Now, if you were a foreign company looking for a product line to acquire and build at a fraction of the cost, what would you look for? That’s right, you would look for the products that are perceived to be among the best on the market, but that are not selling well because they are too expensive… If you can produce that product at a fraction of their cost today, you’ve got a huge, immediate market with tons of distribution channels already in place… From a business-only perspective, it looks like a slam dunk…

What about the long-term, non-shareholder repercussions? What about the other washer and dryer competition who won’t be able to compete with Maytag if their prices are dropped by 50 or 75%? Screw them – after all, it’s all about the Maytag shareholders getting return on their investment, isn’t it? I guess Sears could then follow the Maytag model and sell the Kenmore line to a Chinese manufacturer as well…

This is an issue that needs to be looked at seriously and not evaluated in terms of emotion or from the perspective of it being just another business deal… There are serious potential unintended consequences of getting this snowball rolling, and I am pretty certain that sufficient energy has not been expended on looking into the negative repercussions of this and similar deals…

I doubt the government will be able to find a legitimate reason to prevent CNOOC from acquiring Unocal. Unless things play out like MCI and Verizon then Unocal and its shareholders will probably go for the deal with CNOOC. Even if this deal doesn’t go through there will probably be more significant mergers between Chinese and American companies in the future. Especially if the yuan is revaluated. Then their buying power will almost double in the States. Companies that specialize in reverse take overs for Chinese companies into America will really benefit like Redwood Capital. I have a feeling we’ll see the chinese taking advantage of US capital more and more.